Dorfman: Some lagging stocks might be good buys

It was a rip-roaring first quarter, with U.S. stocks up about 10 percent, but a few hundred stocks missed the party.

Some of those laggards look good to me — Apple and Newmont Mining Corp., for example. I have put them on my Casualty List, a quarterly list of stocks that have gotten into trouble but that I believe will bounce back.

Today’s Casualty List is the 40th I’ve compiled since the series began in 2000. Twelve-month results can be calculated for 36 of the Casualty Lists, and the average one-year return (including reinvested dividends) has been 22 percent, compared with 7.4 percent for the Standard & Poor’s 500 Index.

Not all of my Casualty Lists have done well. Of the 36 lists, 26 were profitable and 23 beat the S&P 500.

The list from a year ago made money but only 7.4 percent versus 13.5 percent for the S&P. Alliant Techsystems (ATK) and Smithfield Foods (SFD) did well, up more than 17 percent and 21 percent respectively. But Hewlett-Packard managed only a 4.7 percent gain and Newmont Mining Corp. (NEM), which I owned for clients at the time, fell 14 percent.

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Bear in mind that the performance of my column recommendations is theoretical and doesn’t reflect transaction costs and taxes. It shouldn’t be confused with the performance of actual portfolios I run for clients. And past performance doesn’t predict future returns.

Banged Up
Now for a new crop of banged-up stocks that I believe have comeback potential.
For the second quarter in a row, I recommend Apple (AAPL). I put it on the Casualty List after it dropped almost 20 percent in price in the fourth quarter of 2012. It fell an additional 16 percent in the first quarter.

Yes, Steve Jobs is gone. Yes, Apple faces increased competition in tablets and the usual frenzied competition in smart phones. Yes, earnings growth shows signs of slowing from the red-hot 43 percent annual pace of the past five years.

Granting all that, it seems to me like a real opportunity to buy an extremely profitable, debt-free company at 10 times earnings.

I’m also going to bring back Newmont Mining Corp. (NEM), which was on the list a year ago. It fell 10 percent last quarter, as investors eschewed gold investments to move into stocks that may do well in a peppier economy.

I don’t currently own Newmont, but I think it will perform well in the coming 12 months. Never mind the mystique of gold, and set aside for a moment the role of gold as a quasi-currency at a time when central banks are easing. Just look at Newmont as if it were a straight industrial stock.

Newmont offers a 4 percent dividend yield. It posted a pretax profit margin of 31 percent last year. It earned a return on equity of better than 13 percent in 2012, and is expected to show higher profits this year ($4.17 a share versus $3.63 last year). And it sells for 11 times earnings.

Cirrus Smacked
A big loser last quarter was Cirrus Logic (CRUS) of Austin, Texas, which fell 21 percent. A leading maker of audio chips, Cirrus was smacked down mostly because close to half of its sales are to Apple. As noted earlier, Apple’s ridiculously high growth rate is slowing.

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In Cirrus, you have a debt-free company with a 45 percent earnings growth rate the past five years, selling for less than 10 times earnings. That is a rarity, and to my way of thinking, a bargain.

An even bigger loser was Cliffs Natural Resources (CLF), the Cleveland, Ohio-based iron ore producer. Cliffs is often viewed as a China play, because close to a quarter of its output goes to Asia, mostly China.

Cliffs is an extraordinarily volatile stock. It was up 157 percent in 2003 and up 110 percent in 2007. It was down 49 percent in 2008 and down 50 percent in this year’s first quarter. I have owned it for clients on and off in the past, with mixed results.

New iron ore supply is being developed in the Great Lakes region, leading some analysts to estimate that the price of iron ore will drop to about $110 per metric ton from the recent level of about $137. Given that outlook, only three of 24 analysts who follow Cliffs recommend it now.

I think they are too pessimistic on the price. And in any case, the bad news is now baked into Cliffs stock price, which is at a four-year low. The stock, which topped $100 a share in 2008, languishes at about $19. In my judgment, the price is simply too low. John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. His firm or clients may own or trade securities discussed in this column.